Economic Sense and Nonsense

Bhagwati, Jagdish, Harvard International Review

Misconceptions of the Global Economy

Regarded as one of the world's most influential economic thinkers, Jagdish Bhagwati has had a significant impact on economic discourse in both political and academic circles. He is currently professor of economics and political science at Columbia University and a director at the National Bureau of Economic Research. He served as the economic policy advisor to the Director-General of GATT, worked with several nongovernmental organizations, founded two economic journals, and advised India's finance minister on economic reforms.

Dr. Bhagwati has published more than 200 articles and 40 books on development theory and policy, public finance, immigration,and political economy. Senior editor Gina Kramer recently spoke with him about the consequences of trade and globalization, the problems of child labor and inequality, and the US role in the global economy.

HARVARD INTERNATIONAL REVIEW:

International organizations have generated much public debate and disagreement recently. What do you see as the proper role of an organization like the IMF in a global economy?

I agree with people who feel that an organization like the IMF is necessary. The more radical views that consider it a moral hazard that leads to excess borrowing and actually promotes and extends crises are just plain wrong. At the same time, the IMF is a continually evolving institution. It goofed up in its initial reaction to the Asian financial crisis, and it also played along with what I call the "Wall Street-Treasury complex." These two factors caused the IMF to increasingly drive nations into capital convertibility, encouraging them to open up financial sectors to relatively free short-term capital flows. This policy is not found in the Fund's original articles of agreement, but the IMF went along with this policy under heavy influence from the United States, a partner in this "Wall Street-Treasury complex." The result was that unregulated, institutionally unadjusted countries, particularly in Asia, accepted this policy more or less under externally imposed pressure.

Essentially, the Fund was itself a complacent partner to these enormous pressures; it should also have been a little more careful in sensitizing South Korea or Thailand to the difficulties inherent in this complicated process of opening markets. These countries helped to bring about the crises by forgetting all the cautionary tales taught in the classroom, and when it happened, the IMF's policy options for the first year made it seem like it was fighting the last war. It tried to be expansionary and yet became very deflationary. I don't blame the Fund because macroeconomics cannot be fine-tuned; nobody has learned how to manage macroeconomic change well for any sustained period of time.

I think where we should compliment the IMF is in looking at the studies which show that after a year's mess, many crisis-stricken countries did turn around. The pattern of the turnaround is due to very quick shifts to better policies which were imposed upon countries by the Fund. This is the worst part of economics; all you can do is learn from your mistakes and hope you're improving the institution in the right direction. On the whole, the IMF is on the right track.

What implications does the Asian financial crisis have for future IMF policy? Will the IMF survive the substantial criticism being leveled at it?

I'm not worried about the IMF for the future, but it has to become more cautionary about pushing countries to freer financial flows. In the China agreement, Wall Street was again putting pressure on the US to push China into opening its financial sector even faster. Wall Street never really learns because its interests are in larger and larger markets, so it goes around claiming that the world has really learned how to manage crises. If China, for instance, goes into a tailspin because it opens up too fast financially just to please Merrill Lynch and former US Treasury Secretary Robert Rubin's friends, it could be a big event. …

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